Are You Accurately Assessing Your Retirement Readiness? Even wealthy taxpayers can be off the mark about their retirement savings.
Published on August 16, 2023
The Center for Retirement Research (Boston College) reported recently that more than 25% of all U.S. households are confident that they will maintain their current standard of living when their retire. However, as the Center discovered, they are at risk of not having enough savings. Even affluent Americans are overly confident about their financial preparedness for their retirement years—even more so than other households.
Every three years, the Center for Retirement Research constructs the National Retirement Risk Index (NRRI) based on assets such as Social Security, retirement plans, and home equity. In its most recent NRRI, 40% of households are “in good shape and know it,” 20% are in bad shape and know it, and 28% were “not worried enough.”
Of note is that among high-income households, 32% of that cohort were “not worried enough” regarding retirement risk. Therefore, in spite of being among the most financially comfortable, they might not be saving enough during their working years for their future retirement. That could spell trouble for people who expect to maintain current spending levels and lifestyle choices; they may have to curtail spending or lower their expectations for those golden years.
The authors of the Center report concluded that a strong housing market (and before 2022, a strong stock market) may have created an illusion of wealth for affluent households who disproportionately own those financial assets,
Factors Affecting Retirement Readiness
Americans’ longevity is forcing us to stretch retirement savings over a longer time horizon. Plus, the gradual rise in the full retirement age for Social Security has put a crimp in many people’s ability to cover their usual expenses more easily.
Traditional employer-sponsored pension plans are being replaced by 401(k) and other qualified retirement plans that require employees to contribute as well.
Millions of other workers have no access to a workplace retirement plan (although of course, they could open an IRA any time if their income level and monthly budget allows for periodic contributions). Therefore, the convenience of the automatic payroll deduction for retirement savings is not available to them.
Competing priorities for hard-earned money means putting money aside for children’s college, paying off one’s student loans, or saving to buy a house. Saving for future health-related costs is also a factor.
Ready or not: The Wealthy Underestimate Their Retirement Risk
The Center for Retirement Research found that nearly one-quarter of affluent households that underestimated their retirement risk are carrying a large amount of housing debt relative to the equity in their homes—three times more than what middle- and lower-income earners are saddled with. And given that Social Security will replace a smaller portion of their annual income than those in lower income ranges, they will have less proportionally to rely on in retirement; therefore, they must save a lot more to maintain their standard of living.
Get Prepared With a Self-Directed IRA
Just ask Sen. Mitt Romney, who built enormous wealth through his self-directed IRA: including alternative assets in a self-directed retirement plan enables savvy investors to build more diverse portfolios, with the potential for more lucrative savings. And, you needn’t be a well-connected public figure, or a wealthy person, to self-direct your retirement plan—just confident in your investment knowledge about the different alternative assets these plans allow.
The investment strategy involved in some self-directed transactions (such as Senator Romney’s initial investments) can be quite complex; others are as simple as researching and understanding what it takes to include precious metals or real estate in a self-directed IRA. Many people include private equity funding, unsecured and secured loans, royalties, mineral rights, and many more alternative assets.
In addition to Traditional and Roth IRAs, you may open a SEP IRA, SIMPLE IRA, or solo(k) for small-business owners. You can also self-direct a health savings account or Coverdell education savings account.
Self-Directed IRAs at Next Generation
At Next Generation, we’ve found that self-directed investors are generally a confident bunch, but there are always questions that arise about nontraditional investments allowed in self-directed IRAs. That’s why we invite you to schedule a complimentary education session with one of our helpful professionals, who can answer your questions about the broad array of alternative assets that can be included in a self-directed plan. You’ll find information about all the documentation you’ll need to open and fund your account in our starter kits. Or you can watch a webinar or download one of our white papers.
Of course, if you prefer, feel free to contact us by email at NewAccounts@NextGenerationTrust.com or call (888) 857-8058 during business hours. We’re always ready to help!
